Why The Market Reaction To China Has Been Encouraging

Editor's note: Below is an interview with Adrian Miller, director of fixed income strategy at GMP Securities. This Q&A went out to subscribers of our "10 Things You Need To Know Before The Opening Bell" newsletter on Thursday morning. Sign up below to get the newsletter and more of these interviews in your inbox every day.

BUSINESS INSIDER: What is the most exciting trade out there right now, in your opinion?

ADRIAN MILLER: Given the lingering uncertainty about whether the U.S. economy will be able to gain sufficient momentum to achieve our full year 3.0% GDP target and whether the Fed will effectively negotiate its wind-down of QE and manage the market’s expectations of its future monetary policy, the most exciting opportunity right now is trading the US Treasury curve.

BI: Which developments in global financial markets, if any, would you flag as most concerning for risk appetite?

AM: The most concerning trend in risk appetite is the dramatic compression of the euro zone periphery debt yield premium versus the German Bund. As investors search for yield with their presumed safety net of the ECB, they are not paying enough heed to the credit risk profile differentiation between the "have" and "have not" countries of the euro zone. This trend has provided a window for Greece's return to the capital markets before they have completed structural reforms, even after the March 2012 sovereign debt restructuring resulted in a 70% haircut.

BI: On the other hand, what is the most encouraging sign?

AM: The most encouraging sign has been the market’s growing skepticism of China’s ability to properly balance its growth initiatives while also enacting historic financial and regulatory reforms and rebalancing its economy from exports driven demand to domestic demand. Getting the balance right will be a Herculean task and requires a fair amount of risk premium to be applied to Chinese financial market assets.

BI: What pieces of new information (e.g. economic data releases, price action in a given market over the next few days/weeks, etc.) do you think have the biggest potential to alter your outlook?

AM: In the near term, I'll be focused on the economic development of what I call the "global growth bookends" — the U.S. and China — and the bond market’s reaction to the Fed's forward guidance message. An excessive hike in long term rates due to an overreaction by the bond market ahead of the domestic and global economy’s ability to absorb the higher rates would significantly risk a stall in global growth.

BI: What do you perceive to be the most misunderstood trend or event in or characteristic of today's markets?

AM: The most misunderstood characteristic is the degree of fragmentation in emerging-market economic trends and the related reform developments. The IMF often claims we are in a two speed global economy, but in truth, the emerging-market region is running at multiple speeds depending on the region and country. Notable differentiation can be found between the EMEA, LatAm and Asia (ex-Japan) regions.